Lesson_54_Speculation - Speculation Forwards, futures, and...

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1 Lesson 54 1 Speculation Forwards, futures, and options can all be used to hedge against unwanted risk But they can also be used to add risk to a portfolio This lesson is about speculation Lesson 54 2 Suppose the 180-day forward rate on pounds is $1.87 Moreover, suppose that an investor is firmly convinced that the spot rate in 180 days will be $1.95 How might that investor profit? Buy pounds forward, solely for purpose of selling them spot when the contract matures Lesson 54 3 This is known as taking a long position in pounds…or going long in pounds Suppose the contract was for £1 million $80,000! If correct, the investor will make a profit of $.08 times one million…
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2 Lesson 54 4 On the downside, if the investor is wrong, could be substantial loss E.g., suppose the actual spot exchange rate turns out to be $1.80 $70,000! After paying $1.87, the investor has no purpose for the pounds (long position), so sells them for a loss of $0.07 each Lesson 54 5 Again assume a forward rate of $1.87
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This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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Lesson_54_Speculation - Speculation Forwards, futures, and...

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